Daniel J. Mitchell (Author at Cato Institute)Individual Liberty, Free Markets, and Peacehttp://www.cato.org/
enamast@cato.org (Andrew Mast)webmaster@cato.org (Cato Webmaster)Mon, 02 Mar 2015 17:17:24 -0500Mon, 02 Mar 2015 18:32:53 -0500If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Capshttp://www.cato.org/blog/forget-balanced-budget-amendment-pursue-spending-caps-achieve-good-fiscal-policy
<p>Back in 2012, I&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/12/20/a-swiss-style-spending-cap-would-have-prevented-the-current-fiscal-mess-in-america/">shared some superb analysis</a>&nbsp;from&nbsp;<em>Investor’s Business Daily&nbsp;</em>showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.</p>
<p><a href="https://danieljmitchell.wordpress.com/2012/12/20/a-swiss-style-spending-cap-would-have-prevented-the-current-fiscal-mess-in-america/"><img src="https://danieljmitchell.files.wordpress.com/2012/12/ibd-spending-cap.jpg?w=312&h=191" width="312" height="191" style="float: left;"></a>And the&nbsp;<em>IBD</em>&nbsp;research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.</p>
<p>Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.</p>
<p>This is a great argument for some sort of spending cap, such as the&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/12/20/a-swiss-style-spending-cap-would-have-prevented-the-current-fiscal-mess-in-america/">Swiss Debt Brake</a>&nbsp;or&nbsp;<a href="https://danieljmitchell.wordpress.com/2013/05/13/tax-and-expenditure-limits-the-challenge-of-turning-mitchells-golden-rule-from-theory-into-reality/">Colorado’s Taxpayer Bill of Rights</a>.</p>
<p>But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.</p>
<!--break--><p>
If you look at the&nbsp;<em>IBD</em>&nbsp;chart, you’ll notice that revenues are not very stable. This is because they are very dependent on the economy’s performance. During years of good growth, revenues tend to rise very rapidly. But when there’s a downturn, such as we had at the beginning and end of last decade, revenues tend to fall.</p>
<p>But you don’t have to believe me or&nbsp;<em>IBD</em>. Just look at&nbsp;<a href="http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/hist01z1.xls">federal tax revenues</a>&nbsp;over the past 30 years. There have been seven years during which nominal tax revenues have increased by more than 10 percent. But there also have been five years during which nominal tax revenue declined.</p>
<p>This instability means that it doesn’t make much sense to focus on a balanced budget rule. All that means is that politicians can splurge during the growth years. But when there’s a downturn, they’re in a position where they have to cut spending or (as we see far too often) raise taxes.</p>
<p>But if there’s a spending cap, then there is a constraint on the behavior of politicians. And assuming the spending cap is set at a proper level, it means that – over time –&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/"><img src="https://i1.wp.com/freedomandprosperity.org/wp-content/uploads/2011/11/golden-rule.jpg" width="280" height="196" style="float: right;"></a>there will be shrinking levels of red ink because the burden of government spending will grow by less than the average growth rate of the private economy.</p>
<p>In other words, compliance with&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/">my Golden Rule</a>!</p>
<p>Let’s look at other examples.</p>
<p>Why did Greece get in fiscal trouble? The long answer has to do with ever-growing government and ever-increasing dependency. But the short answer, at least in part, is that a growing economy last decade generated plenty of tax revenue, but rather than cut taxes and/or pay down debt, Greek politicians&nbsp;<a href="https://danieljmitchell.wordpress.com/2009/12/17/is-greeces-fiscal-crisis-caused-by-too-much-spending-or-too-little-revenue/">went on a spending binge</a>, which then proved to be unsustainable when there was an economic slowdown.*</p>
<p>This is also why California periodically gets in fiscal trouble. During years when the economy is growing and generating tax revenue, the politicians&nbsp;<a href="https://danieljmitchell.wordpress.com/2013/07/21/are-higher-taxes-solving-fiscal-problems-either-in-washington-or-california/">can’t resist the temptation to spend the money</a>, oftentimes creating long-run spending obligations based on the assumption of perpetually rapid revenue growth.<a href="http://freedomandprosperity.org/wp-content/uploads/2015/03/California-Fiscal-Instability.jpg"><img src="https://i1.wp.com/freedomandprosperity.org/wp-content/uploads/2015/03/California-Fiscal-Instability.jpg" width="253" height="173" style="float: left;"></a>These spending commitments then prove to be unaffordable when there’s a downturn and revenues stop growing.</p>
<p>And as you can see from the accompanying graph, this creates a very unstable fiscal situation for the Golden State. Revenue spikes lead to spending spikes. During a downturn, by contrast, revenues are flat or declining, and this puts politicians in a position of either enacting serious spending restraint or (as&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/11/07/californias-economic-suicide-and-other-news-from-yesterdays-ballot-measures/">you might predict with California</a>) imposing anti-growth tax hikes.</p>
<p>And, in the long run, the&nbsp;<a href="https://danieljmitchell.wordpress.com/2013/07/07/final-score-dwight-howard-8000000-jerry-brown-0/">burden of spending rises faster than the private sector</a>.</p>
<p>We have another example to add to our list, thanks to some superb research from Canada’s Fraser Institute.</p>
<p>They recently released&nbsp;<a href="http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/fumbling-the-alberta-advantage.pdf">a study</a>&nbsp;examining fiscal policy in the energy-rich province of Alberta. In particular, the authors (Mark Milke and Milagros Palacios) look at the rapid growth of spending between the fiscal years 2004/05 and 2013/14.</p>
<blockquote><p>By the mid-2000s, even though the province was again spending at a level that contributed to deficits in the early 1990s, after 2004/05 the province allowed program spending to escalate even further and beyond inflation and population growth. The result was that by 2013/14, the province spent $10,967 per person on government programs. That was $2,002 higher per person than in 2004/05.</p></blockquote>
<p>Why did the burden of spending climb so quickly? The simple answer is that bigger government was enabled by tax revenue generated by a prospering energy industry.</p>
<p>Over a nine-year period, politicians spent money based on an assumption that high energy prices were permanent and that tax revenues would always be surging.</p>
<p>But now that energy prices have fallen, politicians are suddenly facing a fiscal shortfall. Simply stated, there’s no longer enough revenue for their spending promises.</p>
<p>This fiscal mess easily could have been avoided if the fecklessness of Alberta politicians had been constrained by some sort of spending cap.</p>
<p>The experts at the Fraser Institute explain how such a limit would have precluded today’s dismal situation.</p>
<blockquote><p>Had the province increased program spending after 2004/05 but within population growth plus inflation, by 2013/14 the province would have spent $35.9 billion on programs. Instead, the province spent $43.9 billion, an $8 billion difference in that year alone. That $8 billion difference is significant. In recent interviews, Alberta Premier Jim Prentice has warned that the drop in oil prices has drained $7 billion from expected provincial government revenues. Thus, past decisions to ramp up program spending mean that additional provincial spending (beyond inflation and population growth) is at least as responsible for current budget gap as the decline in revenues.</p></blockquote>
<p>And here’s a chart from the study showing how much money would have been saved with modest fiscal restraint.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2015/03/Alberta-Golden-Rule.jpg"><img src="https://i0.wp.com/freedomandprosperity.org/wp-content/uploads/2015/03/Alberta-Golden-Rule.jpg" alt="" width="548" height="411"></a></p>
<p>Unfortunately, that’s not what happened. So now today’s politicians have to deal with a mess that is a consequence of profligate politicians during prior years.**</p>
<blockquote><p>…the decision by the province to spend (on programs) above the combined effect of population growth and inflation between 2005/06 and 2013/14 inclusive built in higher annual spending obligations, that, once revenues declined, would open up a fiscal gap in the province’s budget. As of 2013/14, the result of spending more on programs than inflation plus population growth combined would warrant meant program expenses were $8 billion higher in that year alone. The province’s past fiscal choices have now severely constricted present choices on everything from balanced budgets to tax relief to additional capital spending. If the province wishes to have a better menu of choices in the future, it must, obviously, control expenditures more carefully.</p></blockquote>
<p>Since I’ve shared all sorts of bad examples of how nations get in trouble by letting spending grow too fast over time, let’s look at a real-world example of a spending cap in action.</p>
<p><a href="https://danieljmitchell.wordpress.com/2013/11/04/iceland-switzerland-and-the-golden-rule-of-fiscal-policy/"><img src="https://i0.wp.com/freedomandprosperity.org/wp-content/uploads/2013/11/swiss-debt-brake.jpg" width="302" height="199" style="float: left;"></a>As you can see from the chart, Switzerland has&nbsp;<a href="https://danieljmitchell.wordpress.com/2013/11/04/iceland-switzerland-and-the-golden-rule-of-fiscal-policy/">enjoyed great success</a>&nbsp;ever since voters imposed the debt brake.</p>
<p>Indeed, while many other European nations are in fiscal crisis because of&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/08/24/europes-problem-is-excessive-spending-not-austerity/">big increases in the burden of government spending</a>, the Swiss have experienced economic tranquility in part because the size of the public sector has gradually declined.</p>
<p>The key lesson isn’t that spending restraint is good, though that obviously is important. The most important takeaway is that spending restraint appears to be sustainable only if there is some sort of permanent external constraint on politicians. Like the debt brake. Or like&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/10/14/hong-kongs-remarkable-fiscal-policy/">Article 107 of Hong Kong’s Basic Law</a>.</p>
<p>Remember, there are many nations that&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/04/07/the-golden-rule-of-spending-restraint/">have enjoyed good results because of multi-year periods of spending restraint</a>. But many of those countries saw their gains evaporate because policies then moved in the wrong direction.</p>
<p>If you want a sustainable solution, you need a sustainable constraint.</p>
<p>*Greek politicians also took advantage of low interest rates last decade (a result of joining the euro currency) to engage in plenty of debt-financed government spending, which meant the economy was even more vulnerable to a crisis when revenues stopped growing.</p>
<p>**Some of today’s politicians in Alberta are probably long-term incumbents who helped create the mess by over-spending between 2004/05 and today, so I wouldn’t be surprised if they opted for destructive tax hikes instead of long-overdue spending restraint.</p>
http://www.cato.org/blog/forget-balanced-budget-amendment-pursue-spending-caps-achieve-good-fiscal-policyMon, 02 Mar 2015 18:32 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the United Steel Workers strike on CNBC's Power Lunchhttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-united-steel-workers-strike-cnbcs-power
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-united-steel-workers-strike-cnbcs-powerMon, 09 Feb 2015 12:55 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellCato Institute Policy Perspectives 2015 - Welcoming Remarks - The Forever-War President: Obama&rsquo;s Dangerous War-Powers Legacy - Impact of the 2014 Elections on Policyhttp://www.cato.org/multimedia/events/cato-institute-policy-perspectives-2015-welcoming-remarks-forever-war-president
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<td>10:50 &ndash; 11:00 a.m.</td>
<td><strong>Welcoming Remarks</strong><a href="http://www.cato.org/people/John-Allison"><br>
John Allison</a>, President and CEO, Cato Institute</td>
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<td bgcolor="">11:00 &ndash; 11:30 a.m.</td>
<td style="padding-bottom: 8px;" bgcolor=""><strong>The Forever-War President: Obama&rsquo;s Dangerous War-Powers Legacy</strong><br />
<a href="http://www.cato.org/people/gene-healy">Gene Healy</a>, Vice President, Cato Institute</td>
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<td>11:30 a.m.&ndash; 12:10 p.m.</td>
<td style="padding-bottom: 8px;"><strong>Impact of the 2014 Elections on Policy</strong><br />
<a href="http://www.cato.org/people/daniel-mitchell">Daniel Mitchell</a>, Senior Fellow, Cato Institute</td>
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</table>http://www.cato.org/multimedia/events/cato-institute-policy-perspectives-2015-welcoming-remarks-forever-war-presidentWed, 04 Feb 2015 10:30 ESTDaniel J. Mitchell (Author at Cato Institute)John A. Allison, Gene Healy, Daniel J. MitchellDaniel J. Mitchell discusses President Obama's budget proposal on FBN's The Willis Reporthttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-president-obamas-budget-proposal-fbns
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-president-obamas-budget-proposal-fbnsMon, 02 Feb 2015 13:07 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellThe Fiscal and Economic Implications of Mandatory Pension Savingshttp://www.cato.org/publications/commentary/fiscal-economic-implications-mandatory-pension-savings
<p>It is widely believe that aging populations and falling birth rates represent one of biggest global challenges for long-term economic stability.</p>
<p>How can a nation prosper, after all, if there are more and more old people over time and fewer and fewer workers? Don&#8217;t these demographic changes put every-growing fiscal burdens on a shrinking workforce to support the elderly, leading to crippling tax burdens and/or enormous levels of debt?</p>
<p>In most cases, there are no good answers to those questions. So it is quite likely that many nations will face serious economic and fiscal challenges, as estimated by international bureaucracies such as the International Monetary Fund, the Bank for International Settlements, and the Organization for Economic Cooperation and Development.</p>
<p>Here are some charts1 showing the age profile of the world&#8217;s population in both 1990 and 2100. As you can see, demographic changes are turning population pyramids into population cylinders.</p>
<p><em>See figure 1.</em></p>
<p class="center"><img src="http://www.cato.org/sites/cato.org/files/images/img-mitchell.jpg" alt="image" style="border: 0px;" /></p>
<p>While the charts show the entire world, industrialized nations are facing even more dramatic population challenges. Consider what is happening to Japan. Over a 55-year period, a population pyramid turned into a population cylinder. And by the year 2050, something resembling a mixed pyramid/cylinder will return, but it will be upside down. See figure 2.</p>
<p>No wonder Japan has the most debt among all developed nations, both explicit and implicit, compared to economic output. Official government debt already is well above 200 percent of GDP, but that number is dwarfed by the unfunded liabilities of Japan&#8217;s entitlements.</p>
<p>The United States has the dubious honor of having the largest absolute amount of explicit and implicit debt. According to very reasonable estimates, the unfunded liabilities of American entitlement programs are more than $100 trillion. Some well-respected economists even put the number higher than $200 trillion.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">&ldquo;</span><span class="pq-body">Retirement systems based on mandatory saving are a win-win-win for workers, governments, and national economies.&rdquo;</span></p>
</blockquote>
<p>But the goal of this analysis isn&#8217;t to pick on Japan or the United States. The real issue is that virtually every industrialized nation is undergoing demographic changes that will produce some very painful fiscal consequences.</p>
<p><strong>The “funded” pension revolution</strong></p>
<p>Notwithstanding the depressing overall outlook, there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies.</p>
<p>And other nations, including Sweden, Australia, Switzerland, and the Netherlands, have much smaller long-run challenges than other industrialized countries with similar demographic profiles.</p>
<p>Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze. Whether they rely on occupational pensions, individual accounts, or even central provident funds, the common characteristic is that workers automatically set aside a portion of current income so it can be invested in some sort of retirement vehicle. Over several decades, this results in the accumulation of a substantial nest egg that then is used to provide retirement income.</p>
<p>These “funded” systems are in contrast to the “unfunded” retirement arrangements, such as America&#8217;s Social Security system, that simply rely on tax payments from workers to finance the retirement of current retirees. Often known as “pay as you go” plans, such arrangements can work so long as countries have population pyramids featuring ever-growing numbers of workers and smaller cohorts of retirees.</p>
<p>For advocates of funded pension systems, there is good news and bad news. The good news is that there has been a dramatic increase in jurisdictions that have adopted some form of private retirement system. Equally remarkable, there&#8217;s been support for this type of reform from places such as the World Bank, which generally have not been seen as hotbeds of pro-market reform.</p>
<p>Data from the World Bank confirms the growing number of nations with funded mandatory systems &mdash; sometimes referred to as “second pillars” in contrast to pay-as-you-go “first pillars” operated by governments &mdash; as well as the number of people covered by these new retirement structures. Chile was an early pioneer in the shift to funded systems, under the leadership of Jos&eacute; Pi&ntilde;era more than 30 years ago. And if imitation is the highest form of flattery, Pi&ntilde;era launched a very popular wave of reform.</p>
<p>As of 2005, there were about 30 nations with some form of mandatory retirement savings, according to the U.S. Social Security Administration.</p>
<p>While this is impressive growth, the bad news is that mandatory private retirement systems still only cover a small fraction of the world&#8217;s workers. The vast majority of workers with retirement plans are compelled to participate in pay-as-you-go government schemes.</p>
<p><strong>Asset accumulation</strong></p>
<p>Discussions of private retirement regimes often revolve around the implications for government and personal finances. That&#8217;s understandable since politicians care about the money they control and households focus on the money they control. But there are broader economic ramifications.</p>
<p>Economists have been concerned about a triple-whammy caused by traditional tax-and-transfer retirement schemes. First, payroll taxes and other levies discourage labor supply during peak working years. Second, the promise of retirement benefits undermines a very significant incentive to save.</p>
<p>Third, the provision of retirement benefits discourages labor supply once a worker reaches retirement age.</p>
<p>Though it&#8217;s worth noting that payroll taxes are not as damaging as income taxes since workers will perceive (to varying degrees, depending on system design) that some portion of the tax will generate future benefit payments &mdash; sort of a nominal form of deferred compensation. Moreover, retirement benefits can be structured so that there is only a modest impact on labor supply.</p>
<p>But even with caveats, pay-as-you-go systems tend to have adverse economic effects. Systems based on private savings, by contrast, have very little economic downside. Workers are compelled to save and invest some portion of their income, but all of that money will be correctly seen as deferred compensation.</p>
<p>There presumably will be no negative impact on labor supply as a result, either during peak working years or during traditional retirement years.</p>
<p>Perhaps equally important, second-pillar systems boost national savings, which means more funds available to finance productive private-sector investment.</p>
<p>Almost all the leading countries have some form of mandatory retirement savings. To be sure, some people will engage in less voluntary savings because of mandatory retirement systems, so it would be an exaggeration to say that every penny in a second-pillar system adds to the pool of capital. But there surely is a significant net increase in national savings.</p>
<p>And additional savings will lead to deeper capital markets and a more robust financial sector, so the secondary economic effects also will be positive.</p>
<p><strong>Risks</strong></p>
<p>Mandatory private retirement systems are not a panacea. A nation with bad fiscal policy, excessive regulation, protectionism, and corruption is not going to enjoy good economic performance simply because of one reform, regardless of its desirability.</p>
<p>There&#8217;s also a danger that politicians may decide to loot the wealth accumulated in personal retirement accounts. That&#8217;s already happened in Argentina and Hungary, and it most recently happened in Poland.</p>
<p>This is why, in an ideal world, mandatory retirements systems should be designed so that workers can have some assets offshore, preferably managed by a non-domestic company. That provides at least some protection from expropriation. </p>
<p>One common criticism is that funded retirement systems are “too risky” because of volatility in financial markets. There is risk in such systems, of course. Some workers will do better than others for no other reason than being lucky in the timing of when they enter the labor force and leave the labor force.</p>
<p>There&#8217;s also risk in that some fund managers will do better than others when investing the money that workers set aside for retirement.</p>
<p>But these risks are very manageable, particularly when looking at the performance of financial markets over an average worker&#8217;s forty-plus years in the labor force. Indeed, Michael Tanner of the Cato Institute found that even workers who retired right after the stock market crash still would have been better off with personal accounts.</p>
<p>The extreme argument is that personal retirement accounts might be too risky if there is a stock market crash with no recovery, accompanied by a deep economic depression. To be sure, there are very pessimistic scenarios showing that workers in a funded system might get less than what is promised with government-run pay-as-you-go schemes.</p>
<p>But there&#8217;s a big difference between what a government promises and what it can deliver. If there&#8217;s an economic collapse that leads to very bad returns in a funded system, that economic collapse also wipe out any chance that a government will pay promised retirement benefits.</p>
<p><strong>Transition</strong></p>
<p>The other common critique of mandatory retirement savings is that shifting to such a system is unworkable because the payroll taxes that workers would shift to a personal account are the same funds that are used in pay-as-you-go systems to finance benefits to current retirees.</p>
<p>So if younger workers are allowed to shift their payroll taxes into personal accounts, policy makers would need to find lots of money over several decades (trillions of dollars in the American example) to fulfill promises made to existing retirees as well as workers that are too old to get much benefit from personal accounts.</p>
<p>This critique is completely accurate. After all, you can&#8217;t spend the same dollar twice. So it would be very costly, during a transition period, to move to personal accounts.</p>
<p>But here&#8217;s the catch. While trillions of dollars are needed to finance the transition to a system of personal accounts, it&#8217;s also true that trillions of dollars are needed to bail out the current system. In other words, the existing system puts nations such as the United States into a fiscal hole.</p>
<p>The real question is figuring out the best way to climb out of that hole. From a long-term fiscal and economic perspective, personal accounts are the more attractive option.</p>
<p><strong>Conclusion</strong></p>
<p>Funded pension systems obviously don&#8217;t fully solve long-run fiscal challenges. Almost all nations have government-run, pay-as-you-go healthcare schemes for older residents and these often represent even bigger fiscal burdens than retirement programs.</p>
<p>Moreover, a well-functioning pension system obviously won&#8217;t yield big benefits if a nation&#8217;s economy also is burdened by an unstable monetary system, a protectionist trade regime, an ossified regulatory structure, or rampant corruption.</p>
<p>Very few if any economic reforms are an elixir for permanent prosperity. That being said, retirement systems based on mandatory saving are a win-win-win for workers, governments, and national economies.</p>
http://www.cato.org/publications/commentary/fiscal-economic-implications-mandatory-pension-savingsFri, 30 Jan 2015 09:27 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses tax havens on Mises Institute's Mises Weekends with Jeff Deisthttp://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-tax-havens-mises-institutes-mises
http://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-tax-havens-mises-institutes-misesThu, 29 Jan 2015 12:28 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellStatist Policies Undermine the State of the Unionhttp://www.cato.org/publications/commentary/statist-policies-undermine-state-union
<p>President Barack Obama’s State of the Union address was filled with poll-tested buzzwords designed to reach average voters. All presidents do the same thing, so there’s nothing wrong with that, but it’s important to look past the rhetoric and investigate whether lofty words are matched by substantive policy.</p>
<p>This is where the president failed. He repeatedly highlighted how his agenda supposedly is good for the middle class, yet all of his proposed policies would make America more like Europe, where excessive government has led to economic stagnation and fiscal crisis.</p>
<p>But the problem is bigger than his proposed policies. Most of his past policies also increased the burden of government. And that&#8217;s why it&#8217;s rather silly for him to claim that America is now is “strong” shape. Let&#8217;s look at some sobering economic data:</p>
<ul>
<li>Economic growth has been anemic. Normally there are several years of above-average growth after a recession. These post-recession booms are very important since they help people recover lost income. But there&#8217;s been <a href="https://danieljmitchell.wordpress.com/2014/11/11/obamas-legacy-statist-european-style-policies-lead-to-anemic-european-style-economic-performance/">no boom during the supposed Obama recovery</a>. We haven&#8217;t even climbed back up to the long-run average of 3 percent growth.</li>
<li>When the economy suffers from slow growth, it hurts the living standards of ordinary people. Probably the most damning statistic is that <a href="https://danieljmitchell.wordpress.com/2014/08/07/the-no-comparison-comparison-of-reagan-v-obama/">median household income has declined</a> every year that Obama has been in the White House.</li>
<li>Another very grim piece of data is that America&#8217;s labor force participation rate has <a href="https://danieljmitchell.wordpress.com/2015/01/12/if-you-want-to-gauge-the-health-of-the-job-market-focus-on-employment-rather-than-unemployment/">dropped to the lowest level in decades</a>. Yes, it&#8217;s good news that the official unemployment rate has fallen, but it would be much better if it fell because of strong job creation instead of people giving up on finding work.</li>
<li>Since we&#8217;re talking about the unemployment rate, it&#8217;s worth noting that the jobless rate <a href="https://danieljmitchell.wordpress.com/2013/05/08/the-obama-jobs-record-some-good-news-but-only-if-the-bar-is-lowered/">only started falling</a> after the so-called stimulus ended and the burden of government spending began to decline. In other words, the good news was in spite of the president&#8217;s policies.</li>
<li>And since we mentioned government spending, let&#8217;s debunk one of the president&#8217;s big claims. He bragged about a falling deficit (not that a $400 billion-plus deficit is anything to brag about), but red ink has only declined because of <a href="https://danieljmitchell.wordpress.com/2014/12/02/two-very-depressing-charts-for-president-obama-two-very-encouraging-charts-for-americas-taxpayers/">policies that the president opposed</a>, such as sequestration.</li>
<li>In his speech, Obama talked about the importance of making American more competitive, yet he wants to extract more money from the U.S. business sector even though we <a href="https://danieljmitchell.wordpress.com/2012/04/02/with-washington-now-imposing-the-worlds-highest-corporate-tax-rate-every-day-is-april-fools-day-for-american-companies/">already have the world&#8217;s highest corporate tax rate</a>. He also wants to <a href="https://danieljmitchell.wordpress.com/2015/01/20/obamas-class-warfare-tax-plan-targets-the-so-called-rich-but-workers-will-bear-the-burden/">boost the capital gains tax rate</a>, which will be bad news for job-creating investment.</li>
<li>One reason for all these dismal numbers is that there&#8217;s been <a href="https://danieljmitchell.wordpress.com/2014/12/24/strangling-santa-and-everyone-else-with-regulation-and-red-tape/">a dramatic increase in rules, regulations and red tape from Washington</a>. That&#8217;s not good for economic dynamism, particularly since a growing regulatory burden imposes a disproportionate burden on small businesses.</li>
</ul>
<p>The bottom line is that the State of the Union is not strong. We&#8217;re suffering from anemic growth and income stagnation because of an ever-rising burden of taxes, spending and regulation.</p>
<p>Yes, the president was right when he noted that we&#8217;ve created more jobs than Europe and Japan, but that&#8217;s hardly a big achievement since those nations have <a href="https://danieljmitchell.wordpress.com/2014/12/03/europe-is-way-behind-the-united-states-and-here-are-two-more-examples-to-illustrate-why-the-continent-is-in-deep-trouble/">traveled even further in the wrong direction</a>with statist policies.</p>
<p>That&#8217;s the lesson we need to learn. The Obama presidency, <a href="https://danieljmitchell.wordpress.com/2010/04/10/bush-was-a-statist-not-a-conservative/">like the Bush presidency</a>, has moved America in the wrong direction. We need free markets and small government, not intervention and a welfare state.</p>
http://www.cato.org/publications/commentary/statist-policies-undermine-state-unionWed, 21 Jan 2015 09:14 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the State of the Union on FBN's Stosselhttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-state-union-fbns-stossel
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-state-union-fbns-stosselTue, 20 Jan 2015 12:15 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellMinimum Wage Hikes Reduced Employment of Low-Skilled Workershttp://www.cato.org/publications/commentary/minimum-wage-hikes-reduced-employment-low-skilled-workers
<p>It&rsquo;s very frustrating to write about the minimum wage. How often can you make the elementary observation, after all, that you&rsquo;ll get more unemployment if you try to make businesses pay some workers more than they&rsquo;re worth?</p>
<p>But it&rsquo;s my mission to promote economic liberty, so I&rsquo;ve written on why <a href="https://danieljmitchell.wordpress.com/2010/07/24/bush-pelosi-and-reid-deserve-scorn-for-destroying-jobs-for-teenagers/" target="_blank">government-mandated wages can create unemployment</a>by <a href="https://danieljmitchell.wordpress.com/2010/05/27/how-unions-screw-poor-people-out-of-jobs/" target="_blank">making it unprofitable to hire people with low work skills and/or poor work histories</a>. And I&rsquo;ve <a href="https://danieljmitchell.wordpress.com/2010/03/05/bushs-minimum-wage-increase-killed-jobs/" target="_blank">attacked Republicans for going along with these job-killing policies</a>, and also pointed out <a href="https://danieljmitchell.wordpress.com/2011/05/12/policies-that-disproportionately-hurt-blacks-are-bad-even-if-they-are-unintentionally-racist/" target="_blank">the racist impact of such intervention</a>.</p>
<p>Heck, just about everything sensible that needs to be said about the topic is contained in <a href="https://danieljmitchell.wordpress.com/2010/06/14/video-explains-why-government-imposed-minimum-wages-are-wrong/" target="_blank">this short video</a> narrated by Orphe Divougny</p>
<p>But I guess I&rsquo;m the <a href="http://en.wikipedia.org/wiki/Sisyphus" target="_blank">Sisyphus</a> of the free-market movement because, once again, I&rsquo;m going to try to talk some sense into those who think emotion can trump real-world economics.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">&ldquo;</span><span class="pq-body">Understanding ‘unintended consequences’ is a key characteristic of a good economist.&rdquo;</span></p>
</blockquote>
<p>Let&rsquo;s start by citing some new research.</p>
<p>States are allowed to increase minimum wages above the federal level. This creates interesting opportunities to measure what happens to employment when the national minimum wage is increased, since the change presumably doesn&rsquo;t impact states that already are at or above that level.</p>
<p>Two economists from the University of California at San Diego took advantage of this natural experiment and <a href="http://www.voxeu.org/article/how-much-have-minimum-wage-increases-contributed-us-employment-slump" target="_blank">examined employment changes</a> in states that were &ldquo;bound&rdquo; and &ldquo;unbound&rdquo; by the law.</p>
<p>&ldquo;&#8230;we find that minimum wage increases significantly reduced the employment of low-skilled workers. By the second year following the $7.25 minimum&rsquo;s implementation, we estimate that targeted workers&rsquo; employment rates had fallen by 6 percentage points (8%) more in &lsquo;bound&rsquo; states than in &lsquo;unbound&rsquo; states. &#8230;Over the late 2000s the average effective minimum wage rate rose by nearly 30% across the United States. Our best estimate is that these minimum wage increases reduced the employment of working-age adults by 0.7 percentage points. This accounts for 14% of the employment rate&rsquo;s total decline over this time period and amounts to 1.4 million workers. A disproportionate 45% of the affected workers were young adults (aged 15 to 24).&rdquo;</p>
<p>Gee, what a surprise. Fewer jobs.</p>
<p>But the mandated hike in wages didn&rsquo;t just reduce employment.</p>
<p>There were also negative effects on income.</p>
<p>&ldquo;We find that binding minimum wage increases reduced low-skilled individuals&rsquo; average monthly incomes. Targeted workers&rsquo; average incomes fell by an average of $100 over the first year and by an additional $50 over the following two years. &#8230;We provide direct evidence that such losses translate into meaningful reductions in upward economic mobility. Two years following the minimum wage increases we study, low-skilled workers had become significantly less likely to transition into higher-wage employment in bound states than in unbound states.&rdquo;</p>
<p>This evidence on income is particularly important because some statists make a rather utilitarian argument that it&rsquo;s okay for some people to lose jobs because others will benefit.</p>
<p>Jared Bernstein is Exhibit A, as you can see in this debate we had for CNBC.</p>
<p>But let&rsquo;s not just focus on numbers. There are painful human costs when low-skilled workers are priced out of the labor market.</p>
<p>Here are some excerpts from <a href="http://www.wsj.com/articles/michael-saltsman-a-nonprofit-restaurant-falls-to-the-minimum-wage-1420412563" target="_blank">a column</a> in the <em>Wall Street Journal</em>about a real-world example of people losing their jobs.</p>
<p>&ldquo;It&rsquo;s well-established in the economic literature, if not in the minds of proponents of these laws, that the result will be job losses. Yet this empirical reality fails to capture the emotional reality of the employees who are let go, or of the business owners who had no choice but to let them go. &#8230;Michigan&rsquo;s minimum wage rose in September to $8.15 an hour from $7.40 (the minimum wage for tipped employees rose 17%, to $3.10 an hour). The wage will rise to $9.25 by January 2018.&rdquo;</p>
<p>Now let&rsquo;s look at the impact on a non-profit restaurant that helped disadvantaged people.</p>
<p>&ldquo;The staff at Tastes of Life was made up of recovering addicts, recently incarcerated individuals and others who would have a hard time landing a job elsewhere. Mr. Mosley explained that on-the-job offenses for which an employee would have been &ldquo;gone that day&rdquo; in a traditional work setting were instead used as training opportunities at Tastes of Life. &#8230;Mr. Mosley&rsquo;s financial goal was to break even and use any excess funds to subsidize Life Challenge participants. After more than two years of operation on Beck Road, 2½ miles from the center of town, Tastes of Life had a steady flow of loyal customers, but rising food costs presented a challenge. &#8230;Mr. Mosley and Ms. Tucker had planned to print new menus with higher prices to cover the food costs, but the September wage hike complicated those plans, in particular because the increase covered both tipped and non-tipped employees. &#8230;&ldquo;If we had a $10 menu item, it would have to be $14,&rdquo; Mr. Mosley said. The restaurant&rsquo;s customer base of seniors on a fixed income and Hillsdale locals made this option a nonstarter. The restaurant also had to find roughly 250 new customers a month, unrealistic in a small town of about 8,300.&rdquo;</p>
<p>So the inevitable happened.</p>
<p>&ldquo;The increased minimum wage, he told me, was &lsquo;the straw that broke that camel&rsquo;s back,&rsquo; forcing him to close his doors and lay off his 12-person staff. &#8230;with the higher wage costs, the arrangement was no longer feasible, and Tastes of Life closed on Sept. 28. &#8230;Four former employees have been able to leverage their restaurant experience to find new employment, but Mr. Mosley told me that eight are still out of work. &#8230;the loss of Tastes of Life cuts deep, because the benefit for Life Challenge participants was both valuable and is not easily attained elsewhere. These unintended consequences of a minimum wage hike aren&rsquo;t unique to small towns in south-central Michigan. Tragically, they repeat themselves in locales small and large each time legislators heed the populist call to &lsquo;raise the wage.&rsquo;&rdquo;</p>
<p>Understanding &ldquo;unintended consequences&rdquo; is a key characteristic of a good economist.</p>
<p>Indeed, Bastiat&rsquo;s wise words about the &ldquo;seen&rdquo; and &ldquo;unseen&rdquo; help to explain why <a href="https://danieljmitchell.wordpress.com/2011/08/16/paul-krugmans-meets-e-t/" target="_blank">Krugman makes so many mistakes</a>.</p>
<p>But that&rsquo;s a topic for another column (actually, a <a href="https://danieljmitchell.wordpress.com/2014/12/30/another-oops-moment-for-paul-krugman/" target="_blank">whole series of columns</a>).</p>
<p>Today, the goal is simply to understand that it is pointlessly destructive to make low-skilled labor less affordable.</p>
http://www.cato.org/publications/commentary/minimum-wage-hikes-reduced-employment-low-skilled-workersThu, 15 Jan 2015 10:30 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the $1.1 TRILLION continuing resolution Congress passed this weekend on WBAL's The C4 Showhttp://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-11-trillion-continuing-resolution
http://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-11-trillion-continuing-resolutionMon, 05 Jan 2015 11:43 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the carbon tax on FBN's Cavutohttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-carbon-tax-fbns-cavuto
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-carbon-tax-fbns-cavutoMon, 05 Jan 2015 09:30 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses minimum wage increases on CNBC's On the Moneyhttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-minimum-wage-increases-cnbcs-money
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-minimum-wage-increases-cnbcs-moneySat, 03 Jan 2015 09:35 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellAnother “Oops” Moment for Paul Krugmanhttp://www.cato.org/blog/another-oops-moment-paul-krugman
<p>I&#8217;m tempted to feel a certain degree of sympathy for Paul Krugman.</p>
<p>As a leading proponent of the notion that bigger government stimulates growth (a.k.a., <a href="https://danieljmitchell.wordpress.com/2009/04/10/keynesian-economics-is-wrong/">Keynesian economics</a>), he&#8217;s in the rather difficult position of rationalizing why the economy was stagnant when Obama first took office and the burden of government spending was rising.</p>
<p>And he also has to somehow explain why the economy is now doing better at a time when the fiscal burden of government is declining.</p>
<p>But you have to give him credit for creativity. <a href="http://www.nytimes.com/2014/12/29/opinion/paul-krugman-the-obama-recovery.html">Writing</a> in the <em>New York Times</em>, he attempts to square the circle.</p>
<p>Let&#8217;s start with his explanation for results in the United States.</p>
<blockquote><p>&#8230;in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments.</p></blockquote>
<p>If you define “austerity” as spending restraint, Krugman is right. Overall government spending <a href="https://danieljmitchell.wordpress.com/2014/12/02/two-very-depressing-charts-for-president-obama-two-very-encouraging-charts-for-americas-taxpayers/">has barely increased in recent years</a>.</p>
<p>But then Krugman wants us to believe that there&#8217;s been a meaningful change in fiscal policy in the past year or so. Supposedly there&#8217;s been less so-called austerity and this explains why the economy is doing better.</p>
<blockquote><p>The good news is that we&#8230;seem to have&nbsp;stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along&#8230; What held us back was unprecedented public-sector austerity&#8230;now that this de facto austerity is easing, the economy is perking up.</p></blockquote>
<p>But where&#8217;s his evidence? Whether you look at <a href="http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/hist15z3.xls">OMB data</a>, <a href="http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/WEOApr2012all.xls">IMF data</a>, or <a href="http://www.oecd.org/eco/outlook/fiscal-balances-and-public-indebteness.xls">OECD data</a>, all those sources show that overall government spending has been steadily shrinking as a share of GDP ever since 2009.</p>
<!--break--><p>
And deficits also are shrinking as a share of economic output according to all these measures, so there&#8217;s still “austerity” regardless of whether we&#8217;re looking at the <a href="https://danieljmitchell.wordpress.com/2010/04/09/americas-fiscal-problem-is-spending-not-deficits/">underlying disease of government spending</a> or the symptom of red ink.</p>
<p>I sliced and diced the data to see if there was some way of justifying Krugman&#8217;s hypothesis and the only numbers that are (vaguely) supportive are the ones from the IMF that show total government spending (federal, state, and local) has increased by an average of 2.3 percent annually over the past two years, after increasing by 1.3 percent per year over the prior three years.</p>
<p>On that basis, one could sort of argue that Krugman is right and “austerity is easing.”</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/Krugman-U.S.-Austerity1.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/Krugman-U.S.-Austerity1.jpg" alt="" width="744" height="509"></a></p>
<p>But if that&#8217;s his definition of victory, then I&#8217;m more than willing to let him be the winner. If we can constrain the public sector so that it grows at 2.3 percent annually, we&#8217;ll be complying with <a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/">my Golden Rule</a> and the burden of government spending will continue to slowly but surely shrink as a share of GDP.</p>
<p>And we&#8217;ll definitely have much better fiscal policy than we had between 2002-2009, when overall government spending rose by an average of 7.1 percent annually.</p>
<p>So does this mean Krugman and I are on the same page?&nbsp;</p>
<p>You may sense a slight tone of sarcasm in my remarks, and that&#8217;s because Krugman surely doesn&#8217;t want government to “only” grow by 2.3 percent annually. He simply wants to justify his hypothesis that the economy&#8217;s improving performance is somehow due to less austerity. Even if that means he&#8217;s implicitly endorsing genuine spending restraint.</p>
<p>In other words, Krugman actually is being slippery and misleading in his analysis of American austerity.</p>
<p>But that&#8217;s nothing compared to his analysis of so-called austerity on the other side of the Atlantic Ocean. Here&#8217;s some of what he wrote about fiscal policy in the United Kingdom.</p>
<blockquote><p>&#8230;in 2010 Britain’s newly installed Conservative government declared that a sharp reduction in budget deficits was needed to keep Britain from turning into Greece. Over the next two years growth in&nbsp;the British economy, which had been recovering fairly well from the financial crisis, more or less stalled. In 2013, however, growth picked up again — and the British government claimed vindication for its policies. Was this claim justified? No, not at all.</p></blockquote>
<p>Krugman then claims that there was better economic performance because U.K. politicians decided against “further cuts.”</p>
<blockquote><p>What actually happened was that the Tories stopped tightening the screws — they didn’t reverse the austerity that had already occurred, but they effectively put a hold on further cuts. &#8230;And sure enough, the nation started feeling better.</p></blockquote>
<p>So is he right?</p>
<p>Well, the IMF numbers show that overall government spending has been growing, on average, by 2 percent annually since 2009. By today&#8217;s standards, that&#8217;s a decent record of spending restraint.</p>
<p>But what if we dissect the numbers? Did spending grow very slowly between 2010-2012, followed by a relaxation of restraint beginning in 2013? In other words, is Krugman&#8217;s argument legitimate, even if it requires him to implicitly endorse (as in the American example) decent fiscal discipline over the past two years?</p>
<p>Nope. Instead, the numbers show just the opposite. Between 2010-2012, the burden of government spending expanded by an average of 2.3 percent per year.</p>
<p>But over the past two years, the “austerity” has become tighter and the budget has grown by 1.5 percent annually.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/Krugman-U.K.-Austerity1.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/Krugman-U.K.-Austerity1.jpg" alt="" width="745" height="510"></a></p>
<p>In other words, it seems that Krugman is either sloppy or mendacious.</p>
<p>Though I&#8217;m going to give him an escape hatch, a way of justifying his assertions. When the Tories took over in the United Kingdom, they quickly imposed <a href="https://danieljmitchell.wordpress.com/2010/10/17/we-should-copy-the-clever-british-campaign-against-higher-capital-gains-tax-rates/">a series of tax hikes</a> (in addition to the <a href="https://danieljmitchell.wordpress.com/2011/04/03/a-victory-for-the-laffer-curve-a-defeat-for-englands-economy/">tax hikes imposed</a> by the outgoing Labor government). But since that time, the government has implemented some tax cuts, most notably <a href="https://danieljmitchell.wordpress.com/2014/06/11/more-evidence-for-the-laffer-curve-and-lower-corporate-tax-rates/">reductions in corporate tax rates</a> and <a href="https://danieljmitchell.wordpress.com/2012/07/01/the-laffer-curve-wreaks-havoc-in-the-united-kingdom/">lower tax rates on personal income</a>.</p>
<p>So if Krugman wants to argue that tax increases decelerated&nbsp;the British economy for a few years and that tax cuts are now helping to boost growth, I&#8217;m willing to give him a probationary membership in the supply-side club.</p>
<p>But I don&#8217;t expect him at the next meeting.</p>
<p>P.S. This isn&#8217;t the first time Krugman has <a href="https://danieljmitchell.wordpress.com/2013/01/23/is-anybody-surprised-that-krugman-was-wrong-about-u-k-fiscal-policy/">mangled numbers</a> when analyzing U.K. fiscal policy.</p>
<p>P.P.S. He&#8217;s also butchered data when writing about fiscal policy in nations such as <a href="https://danieljmitchell.wordpress.com/2012/05/08/paul-krugman-and-the-european-austerity-myth/">France</a>,&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/06/07/estonia-and-austerity-another-exploding-cigar-for-paul-krugman/">Estonia</a>, and <a href="https://danieljmitchell.wordpress.com/2014/02/24/the-missing-data-in-krugmans-german-austerity-narrative/">Germany</a>,</p>
http://www.cato.org/blog/another-oops-moment-paul-krugmanTue, 30 Dec 2014 12:49 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellThe Final Nail in the Keynesian Coffin?http://www.cato.org/blog/final-nail-keynesian-coffin
<p>I <a href="https://danieljmitchell.wordpress.com/2014/05/26/the-perplexing-durability-of-keynesian-economics/">wrote earlier this year</a> about the “perplexing durability” of Keynesian economics. And I didn&#8217;t mince words.</p>
<blockquote><p>Keynesian economics <a href="https://danieljmitchell.wordpress.com/2014/01/31/yet-another-example-of-the-failure-of-keynesian-economics/">is a failure</a>. It didn’t work for <a href="https://danieljmitchell.wordpress.com/2011/07/10/heres-more-evidence-for-andrew-sullivan-about-herbert-hoovers-big-government-statism/">Hoover and Roosevelt</a> in the 1930s. It didn’t work for <a href="https://danieljmitchell.wordpress.com/2013/01/15/the-basket-case-sometimes-known-as-japan/">Japan</a> in the 1990s. And it didn’t work for Bush or <a href="https://danieljmitchell.wordpress.com/2011/08/24/is-obama-really-going-to-propose-another-keynesian-stimulus/">Obama</a> in recent years. No matter where’s it’s been tried, it’s been a flop. So why, whenever there’s a downturn, do politicians resuscitate the idea that bigger government will “stimulate” the economy?</p></blockquote>
<p>And I <a href="https://danieljmitchell.wordpress.com/2013/03/06/challenge-for-keynesian-anti-sequester-hysterics-why-did-americas-economy-boom-when-reagan-and-clinton-reduced-the-burden-of-spending/">specifically challenged Keynesians in 2013</a> to explain why automatic budget cuts were supposedly a bad idea given that the American economy expanded when the burden of government spending shrank during the Reagan and Clinton years.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/bush-v-reagan-v-clinton-spending-gdp2.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/bush-v-reagan-v-clinton-spending-gdp2.jpg" style="float: right;" width="400"></a>I also issued that same challenge one day earlier, asking Keynesians to justify their opposition to sequestration given that <a href="https://danieljmitchell.wordpress.com/2013/03/05/challenge-for-keynesian-anti-sequester-hysterics-why-did-canadas-economy-boom-when-the-burden-of-spending-was-sharply-reduced/">Canada&#8217;s economy prospered in the 1990s when government spending was curtailed</a>.</p>
<p>It seems that the evidence against Keynesianism is so strong that only a fool, a politician, or a college professor could still cling to the notion that bigger government lead to more growth.</p>
<p>Fortunately, it does appear that there&#8217;s a growing consensus against this free-lunch theory.</p>
<!--break--><p>Professor John Cochrane of the University of Chicago (and also an Adjunct Scholar at Cato) has <a href="http://www.wsj.com/articles/john-h-cochrane-an-autopsy-for-the-keynesians-1419205362">a superb column</a> about the retreat of Keynesianism in today&#8217;s Wall Street Journal.</p>
<blockquote><p>The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy. &#8230;Why? In part, because even in economics, you can’t be wrong too many times in a row. &#8230;Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster. With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.</p></blockquote>
<p>All of this is spot on. Once the stimulus was <a href="https://danieljmitchell.wordpress.com/2014/12/02/two-very-depressing-charts-for-president-obama-two-very-encouraging-charts-for-americas-taxpayers/">replaced by spending restraint</a>, the economy did better. <a href="https://danieljmitchell.files.wordpress.com/2014/12/ae78f-riley_keynesian_toon.jpg"><img src="https://danieljmitchell.files.wordpress.com/2014/12/ae78f-riley_keynesian_toon.jpg" style="float: right;" width="240"></a>And job creation picked up when <a href="https://danieljmitchell.wordpress.com/2014/07/06/the-left-was-wrong-about-unemployment-insurance-plus-a-message-from-1948-about-markets-vs-statism/">subsidies for unemployment were limited</a>, just as more sensible economists predicted.</p>
<p>Cochrane is also correct about the spending restraint in the United Kingdom. I didn&#8217;t expect Cameron and Osbourne to <a href="https://danieljmitchell.wordpress.com/2014/12/05/another-victory-for-fiscal-responsibility-the-death-of-earmarks/">deliver some good fiscal policy</a>, but it&#8217;s happening and the British economy is the envy of most other European nations.</p>
<p>The column also looks at <a href="https://danieljmitchell.wordpress.com/2010/06/01/slash-government-spending-to-boost-economy/">past Keynesian failures</a>.</p>
<blockquote><p>These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.</p></blockquote>
<p>But this isn&#8217;t just about empirical evidence.</p>
<p>I&#8217;ve <a href="https://danieljmitchell.wordpress.com/2014/03/09/making-fun-of-keynesian-economics/">used humor</a> to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why <a href="https://danieljmitchell.wordpress.com/2010/03/13/keynesian-economics-and-the-wizard-of-oz/">the theory doesn&#8217;t make sense</a>.</p>
<blockquote><p>Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time. I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice. &#8230;in Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume.</p></blockquote>
<p>By the way, just in case you think he&#8217;s exaggerating, keep in mind that Paul Krugman actually argued that <a href="https://danieljmitchell.wordpress.com/2011/08/18/the-keynesian-crackup-continues-from-space-aliens-to-food-stamp-stimulus/">a fake invasion from outer space would “stimulate” growth</a> because the world would waste money building defenses against E.T.</p>
<p>And Krugman also <a href="https://danieljmitchell.wordpress.com/2010/03/31/excellent-video-channeling-bastiat/">argued that the 9-11 terrorist attacks were pro-growth</a>!</p>
<p>Cochrane closes with some optimistic thoughts.</p>
<blockquote><p>&#8230;no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons. &#8230;the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.</p></blockquote>
<p>I wish I was equally optimistic about the death of Keynesianism. As <a href="https://danieljmitchell.wordpress.com/2010/08/23/why-is-keynesian-economics-like-a-freddy-krueger-movie/">I glumly stated a few years ago</a>, Keynesian economics is like a Freddy Krueger move, inevitably rising from the dead when politicians want to rationalize wasting money on favored interest groups.</p>
<p>But I hope Cochrane is right and I&#8217;m wrong.</p>
<p>For further information, here&#8217;s <a href="https://danieljmitchell.wordpress.com/2009/04/10/keynesian-economics-is-wrong/">my video</a> on Keynesian economics.</p>
<div class="oembed oembed-video">
<a href="https://www.youtube.com/watch?v=VoxDyC7y7PM" class="oembed-title">Keynesian Economics Is Wrong: Bigger Gov&#8217;t Is Not Stimulus</a><br />
<div class="oembed-content responsivevideo-wrapper" style="padding-top: 74.945533769063%">
<iframe src="http://www.youtube.com/embed/VoxDyC7y7PM?feature=oembed&wmode=transparent" frameborder="0" allowfullscreen wmode="transparent"></iframe></div>
</div>
<p>P.S. Since it&#8217;s the holiday season and I&#8217;m sharing videos, here&#8217;s <a href="https://danieljmitchell.wordpress.com/2012/12/06/a-perfect-holiday-album-for-the-keynesians-on-your-christmas-list/">a very clever and funny video</a> about Keynesian Christmas carols.</p>
<div class="oembed oembed-video">
<a href="https://www.youtube.com/watch?v=7uKnd6IEiO0" class="oembed-title">Deck the Halls with Macro Follies</a><br />
<div class="oembed-content responsivevideo-wrapper" style="padding-top: 56.25%">
<iframe src="http://www.youtube.com/embed/7uKnd6IEiO0?feature=oembed&wmode=transparent" frameborder="0" allowfullscreen wmode="transparent"></iframe></div>
</div>
<p>The songs in the second half of the video are the ones that make sense, of course, and I particularly like the point that <a href="https://danieljmitchell.wordpress.com/2013/01/31/making-sense-of-keynesian-laced-gdp-reports/">consumer spending is a reflection of growth</a>, not a driver of growth.</p>
<p>P.P.S. If you want even more visual content, here’s the <a href="https://danieljmitchell.wordpress.com/2010/01/26/another-video-for-me-to-envy/">famous video showing the Keynes v. Hayek rap contest</a>, followed by the equally entertaining sequel, which features a <a href="https://danieljmitchell.wordpress.com/2011/04/28/the-long-awaited-second-installment-of-the-hayek-v-keynes-rap-video/">boxing match between Keynes and Hayek</a>.</p>
<p>P.P.P.S. But if you want more humor about Keynesian economics, click <a href="https://danieljmitchell.wordpress.com/2012/07/17/a-cartoon-showing-the-logic-or-lack-thereof-of-keynesian-economics/">here</a>, <a href="https://danieljmitchell.wordpress.com/2012/02/06/classic-cartoon-on-so-called-stimulus-is-amusing-and-economically-accurate/">here</a>, here, and <a href="https://danieljmitchell.wordpress.com/2011/09/01/keynesian-economics-in-a-cartoon/">here</a>.</p>
<p>P.P.P.P.S. Let&#8217;s end on a serious note. It&#8217;s encouraging that <a href="https://danieljmitchell.wordpress.com/2014/10/03/nations-leader-rejects-keynesian-economics-acknowledges-that-real-jobs-are-created-by-the-private-sector/">leaders from nations</a> at <a href="https://danieljmitchell.wordpress.com/2012/04/24/portuguese-finance-minister-admits-keynesian-stimulus-was-a-flop-but-dont-hold-your-breath-waiting-for-obama-to-make-a-similar-confession/">opposite ends of Europe</a> are acknowledging the shortcomings of Keynesianism.</p>
http://www.cato.org/blog/final-nail-keynesian-coffinMon, 22 Dec 2014 15:01 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the year in review on BBC Radio's In The Balancehttp://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-year-review-bbc-radios-balance
http://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-year-review-bbc-radios-balanceFri, 19 Dec 2014 10:54 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellA Practical (and Semi-Optimistic) Plan to Tame the Federal Leviathanhttp://www.cato.org/blog/practical-semi-optimistic-plan-tame-federal-leviathan
<p>Like a lot of libertarians and small-government conservatives, I&#8217;m prone to pessimism. How can you be cheerful, after all, when you look at what&#8217;s been happening in our lifetimes.</p>
<p><a href="http://plimages.blob.core.windows.net/article-images/cartoons/WednesdayCartoon.jpg"><img src="http://plimages.blob.core.windows.net/article-images/cartoons/WednesdayCartoon.jpg" width="211" height="137" style="float: right;"></a>New entitlement programs, adopted by politicians from all parties, are <a href="https://danieljmitchell.wordpress.com/2014/05/08/the-slow-motion-train-wreck-of-entitlement-programs/">further adding to the long-run spending crisis</a>.</p>
<p>The federal budget has become much bigger, luring <a href="https://danieljmitchell.wordpress.com/2011/10/06/the-greece-ification-of-america/">millions of additional people into government dependency</a>.</p>
<p>The tax code has become <a href="https://danieljmitchell.wordpress.com/2011/09/25/a-picture-of-tax-code-complexity-and-corruption/">even more corrupt and complex</a>, with more than 4,600 changes just between 2001 and 2012 according to <a href="http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=e1f80788-49ce-4bef-b30d-2c2d074a4f7e">a withering report</a> from outgoing Senator Tom Coburn of Oklahoma.</p>
<p>And let&#8217;s not forget the essential insight of “public choice” economics, which tells us that politicians care first and foremost about their own interests rather than the national interest. So what&#8217;s their incentive to address these problems, particularly if there&#8217;s some way to sweep them under the rug and let future generations bear the burden?</p>
<p>And if you think I&#8217;m being unduly negative about political incentives and fiscal responsibility, consider the new report from the European Commission, which found that politicians from EU member nations routinely enact budgets based on “rosy scenarios.” As the <em>EU Observer</em> <a href="http://euobserver.com/news/126968">reported</a>:</p>
<blockquote><p>EU governments are too optimistic about their economic prospects and their ability to control public spending, leading to them continually missing their budget targets, a European Commission paper has argued. &#8230;their growth projections are 0.6 percent higher than the final figure, while governments who promise to cut their deficit by 0.2 percent of GDP, typically tend to increase their gap between revenue and spending by the same amount.</p></blockquote>
<p>Needless to say, American politicians do the same thing with their forecasts. If you don&#8217;t believe me, just look at the way <a href="https://danieljmitchell.wordpress.com/2011/03/24/im-shocked-shocked-that-obama-wasnt-telling-the-truth-about-the-cost-of-obamacare/">the books were cooked</a> to help impose Obamacare.</p>
<p>But set aside everything I just wrote because now I&#8217;m going to tell you that we&#8217;re making progress and that it&#8217;s actually not that difficult to constructively address America&#8217;s fiscal problems.</p>
<p>First, let&#8217;s look at how we&#8217;ve made progress. I just wrote <a href="http://thehill.com/blogs/pundits-blog/economy-budget/227495-republicans-are-winning-the-fiscal-fight">a piece</a> for <em>The Hill</em>. It&#8217;s entitled “Republicans are Winning the Fiscal Fight” and it includes lots of data on what&#8217;s been happening over the past five years, including the fact that <a href="https://danieljmitchell.wordpress.com/2014/12/02/two-very-depressing-charts-for-president-obama-two-very-encouraging-charts-for-americas-taxpayers/">there&#8217;s been no growth in the federal budget</a>.</p>
<!--break--><p>You should read <a href="http://thehill.com/blogs/pundits-blog/economy-budget/227495-republicans-are-winning-the-fiscal-fight">the entire thing</a> for full context, but here are a few brief excerpts on why the left can&#8217;t be feeling very happy right now.</p>
<blockquote><p>&#8230;Democrats presumably can&#8217;t be happy that the lion&#8217;s share of the Bush tax cuts were made permanent. &#8230;revenues are now projected to average only 18 percent of GDP over the next 10 years&#8230;a smaller tax burden than we had throughout the Clinton years. And you can&#8217;t finance big government in the long run without a lot more revenue. And they definitely can&#8217;t be happy that domestic discretionary spending is now below where it was during the Bush years, when measured as a share of GDP. And with sequester-enforced budget caps, it&#8217;s quite likely that number will drop even further. &#8230;Perhaps even more important, looking forward, is that House Republicans for four consecutive years have approved budget resolutions that assume genuine reform of <a href="https://danieljmitchell.wordpress.com/2011/05/17/whos-right-on-medicare-reform-ryan-and-rivlin-or-obama-and-gingrich/" target="_blank">Medicare</a> and <a href="https://danieljmitchell.wordpress.com/2011/06/27/block-granting-medicaid-is-a-long-overdue-way-of-restoring-federalism-and-promoting-good-fiscal-policy/" target="_blank">Medicaid</a>. And they&#8217;ve won their biggest majority since before World War II, so GOPers can feel reasonably confident that voters (perhaps sobered up by the <a href="https://danieljmitchell.wordpress.com/2014/10/15/excessive-government-spending-in-europe-sewing-the-seeds-for-another-fiscal-crisis/" target="_blank">fiscal disarray in Europe</a>) understand the need to modernize these programs.</p></blockquote>
<p>By the way, the point about keeping taxes under control is critical. Simply stated, it&#8217;s <a href="https://danieljmitchell.wordpress.com/2011/11/17/some-conservative-members-of-the-stupid-party-push-for-tax-increases-to-enable-bigger-government/">virtually impossible</a> for government to get much bigger without a stream of new revenue (or, in the case of <a href="https://danieljmitchell.wordpress.com/2014/04/04/support-the-vat-if-you-oppose-entitlement-reform-and-want-more-spending-and-more-debt/">a value-added tax</a>, a river of new revenue).</p>
<p>Let&#8217;s now focus on the second issue, which is how we can maintain this progress.</p>
<p>Here&#8217;s a chart <a href="https://danieljmitchell.wordpress.com/2014/09/12/obamacare-cost-curves-the-ever-worsening-entitlement-crisis-and-the-case-for-spending-restraint/">I put together back in September</a> that showed projected revenue over the next 10 years (blue line). I then showed what happens if spending is left on autopilot and also what happens if policymakers simply restrain spending so that it grows 2 percent annually (gold line), which is actually a bit higher than inflation.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/09/Budget-Balance-2-percent-spending-growth.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/09/Budget-Balance-2-percent-spending-growth.jpg" alt="" width="619" height="386"></a></p>
<p>As you can see, it&#8217;s very simple to achieve a budget surplus. And we don&#8217;t even need the same amount of spending restraint that we enjoyed over the past five years!</p>
<p>The challenge, of course, is that Obama and many other politicians (including quite a few Republicans) don&#8217;t want government on a diet. After all, why let government “only” grow 2 percent each year when you can please the <a href="https://danieljmitchell.wordpress.com/2014/11/04/how-washington-profits-by-pillaging-america/">lobbyists, bureaucrats, cronyists, contractors, and other insiders</a> by letting spending increase two or three times faster than inflation?</p>
<p>Fiscal probity isn&#8217;t easy. Genuine spending restraint not only means saying no to special interests and campaign contributors, it also means picking smart fights. In some cases, Obama and the left may dig in their heels and threaten a partial government shutdown in hopes of getting bigger budgets.</p>
<p>Sometimes such fights are unwise, but there&#8217;s a very strong case to be made that the GOP ultimately prevailed in the <a href="https://danieljmitchell.wordpress.com/2011/02/25/can-the-gop-win-the-government-shutdown-fight/">1995</a> and <a href="https://danieljmitchell.wordpress.com/2013/10/17/five-important-takeaways-from-the-government-shutdown-debt-limit-fight/">2013</a> shutdown battles.</p>
<p>The bottom line, as illustrated by this amusing A.F. Branco cartoon, is that Republicans shouldn&#8217;t automatically wilt if there&#8217;s a fight over something that really matters - such as a growing <a href="https://danieljmitchell.wordpress.com/2012/03/04/a-fiscal-policy-tutorial-everything-you-need-to-know-about-the-economics-of-government-spending/">burden of government spending</a>.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/Shutdown-Mouse-Cartoon.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/Shutdown-Mouse-Cartoon.jpg" alt="" width="600" height="428"></a></p>
<p>And it also means not falling back into bad habits. Republicans were <a href="https://danieljmitchell.wordpress.com/2011/03/18/bush-was-not-a-conservative/">profligate big spenders during the Bush years</a> and it&#8217;s not easy to stay on the wagon of spending restraint.</p>
<p>This Lisa Benson cartoon is a good illustration of what will happen if GOPers cater too much to special interests.</p>
<p><a href="http://media.townhall.com/Townhall/Car/b/lb1217cd20141216085313.jpg"><img src="http://media.townhall.com/Townhall/Car/b/lb1217cd20141216085313.jpg" alt="" width="462" height="350"></a></p>
<p>For more information showing how it is simple to make progress, here&#8217;s my video explaining how simple it is to balance the budget with modest spending restraint. It&#8217;s several years old, so just keep in mind the chart above as you watch.</p>
<div class="responsivevideo-wrapper" style="padding-top: 82.352941176471%">
<iframe src="http://www.youtube.com/embed/xezWd7VU2Ug?wmode=transparent" frameborder="0" wmode="transparent"></iframe></div>
<p>Though I hasten to add that the <a href="https://danieljmitchell.wordpress.com/2010/04/09/americas-fiscal-problem-is-spending-not-deficits/">real goal isn&#8217;t balancing the budget</a>. I&#8217;m far more interested in restoring a limited, constitutionally restrained federal government.</p>
<p>If we do that, fiscal balance is an easy and obvious consequence. In other words, if you deal with the <a href="https://danieljmitchell.wordpress.com/2009/12/15/the-problem-is-spending-not-deficits/">underlying disease of too much government</a>, you automatically eliminate the symptom of red ink.</p>
<p>P.S. Since I mentioned government shutdowns, I should point out some very good cartoons and jokes on that topic. They can be viewed <a href="https://danieljmitchell.wordpress.com/2013/10/02/government-shutdown-humor/">here</a>, <a href="https://danieljmitchell.wordpress.com/2013/10/08/government-shutdown-jokes-and-the-sick-joke-of-obamas-shutdown-strategy/">here</a>, <a href="https://danieljmitchell.wordpress.com/2013/10/22/the-unrecognized-shutdown-victory-and-some-after-the-fact-shutdown-humor/">here</a>, <a href="https://danieljmitchell.wordpress.com/2013/10/14/time-to-get-rid-of-the-national-park-service/">here</a>, and <a href="https://danieljmitchell.wordpress.com/2012/05/21/another-government-shutdown-fight-in-washingtons-future/">here</a>.</p>
http://www.cato.org/blog/practical-semi-optimistic-plan-tame-federal-leviathanThu, 18 Dec 2014 15:09 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellRepublicans Are Winning the Fiscal Fighthttp://www.cato.org/publications/commentary/republicans-are-winning-fiscal-fight
<p>Can you name the president in the post-World War II era who presided over the <a target="_blank" href="https://danieljmitchell.wordpress.com/2014/12/02/two-very-depressing-charts-for-president-obama-two-very-encouraging-charts-for-americas-taxpayers/">largest five-year reduction in the burden of government spending</a>, measured as a share of economic output?</p>
<p>Or how about the president who was in office when nominal federal spending shrank for two consecutive years and had no growth over a five-year period?</p>
<p>Here&#8217;s another question: Can you also name the president who signed a 10-year tax cut of nearly $4 trillion?</p>
<p>Last but not least, can you name the president who signed the law enabling an <a target="_blank" href="https://danieljmitchell.wordpress.com/2013/03/04/obama-suffers-a-painful-loss-in-the-first-big-fiscal-battle-of-his-second-term/">automatic 10-year budget cut of more than $1 trillion</a>?</p>
<p>No, we&#8217;re not talking about Ronald Reagan. The answer to all four questions is Barack Obama.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">&ldquo;</span><span class="pq-body">There&#8217;s been a remarkable shift in fiscal policy.&rdquo;</span></p>
</blockquote>
<p>This is the great untold story of the Obama presidency. A president who wanted to “fundamentally transform” the country has completely failed to make America more like France. He didn&#8217;t even make us more like Germany.</p>
<p>This isn&#8217;t big news</p>
<p>Now let&#8217;s splash some cold water on GOPers who want to get all excited. Yes, federal spending has dropped from 24.4 percent of gross domestic product (GDP) in 2009 to 20.3 percent of GDP in 2014, but that still means the burden of government spending is higher than it was in 2008 (20.2 percent of GDP) and far higher than it was <a target="_blank" href="https://danieljmitchell.wordpress.com/2013/03/14/senator-patty-murray-is-right-and-completely-wrong-about-the-1990s/">when Bill Clinton left office</a> (17.6 percent of GDP). Similarly, it&#8217;s not a huge achievement to freeze spending for five years when the base year of 2009 featured both an explosion of Troubled Asset Relief Program (TARP) spending as well as lots of “stimulus” outlays.</p>
<p>Moreover, the $4 trillion tax cut was only a tax cut compared to a “baseline” which assumed all the 2001 and 2003 tax cuts would expire. What actually happened is that Obama was able to push the top income tax rate back up to where it was before the George W. Bush presidency. And he also increased the double taxation of dividends and capital gains. Finally, the sequester “cuts” also were against a baseline, so the real-world impact is simply to <a target="_blank" href="https://danieljmitchell.wordpress.com/2013/02/05/exposing-the-absurdity-of-washingtons-anti-sequester-hysteria/">slow the growth of government</a>.</p>
<p>This is big news</p>
<p>But even with all the aforementioned caveats, there&#8217;s been a remarkable shift in fiscal policy.</p>
<p>Many Democrats presumably can&#8217;t be happy that the lion&#8217;s share of the Bush tax cuts were made permanent. As a result, revenues are now projected to average only 18 percent of GDP over the next 10 years. That&#8217;s a smaller tax burden than we had throughout the Clinton years. And you can&#8217;t finance big government in the long run without a lot more revenue.</p>
<p>And they definitely can&#8217;t be happy that domestic discretionary spending is now below where it was during the Bush years, when measured as a share of GDP. And with sequester-enforced budget caps, it&#8217;s quite likely that number will drop even further.</p>
<p>Republicans, meanwhile, should be happy that all their fiscal battles have paid dividends. As a general rule, GOPers think that they lost the various shutdown fights, appropriations battles and debt limit showdowns. But short-term polling doesn&#8217;t matter nearly as much as the long-term policy results (not to mention the fact that voters just gave the GOP a landslide victory).</p>
<p>Perhaps even more important, looking forward, is that House Republicans for four consecutive years have approved budget resolutions that assume genuine reform of <a target="_blank" href="https://danieljmitchell.wordpress.com/2011/05/17/whos-right-on-medicare-reform-ryan-and-rivlin-or-obama-and-gingrich/">Medicare</a> and <a target="_blank" href="https://danieljmitchell.wordpress.com/2011/06/27/block-granting-medicaid-is-a-long-overdue-way-of-restoring-federalism-and-promoting-good-fiscal-policy/">Medicaid</a>. And they&#8217;ve won their biggest majority since before World War II, so GOPers can feel reasonably confident that voters (perhaps sobered up by the <a target="_blank" href="https://danieljmitchell.wordpress.com/2014/10/15/excessive-government-spending-in-europe-sewing-the-seeds-for-another-fiscal-crisis/">fiscal disarray in Europe</a>) understand the need to modernize these programs.</p>
<p>A turning point in 2017?</p>
<p>It&#8217;s unlikely that either party will alter the fiscal outlook over the next two years. At the risk of stating the obvious, any White House initiatives to expand the burden of government will get a chilly reception on Capitol Hill. But it&#8217;s equally true that Republicans have almost no chance of forcing additional spending restraint over a presidential veto.</p>
<p>But 2017 could be different, at least for Republicans. If they manage to win the White House and hold the Senate, then serious entitlement reform is genuinely possible. So not only will America have avoided becoming France or Germany during the Obama years, but the country would also be spared that fate in the 2020s and 2030s when tens of millions of baby boomers will be retired.</p>
<p>The best the Democrats can hope for, by contrast, is to block entitlement reforms by retaining the White House and/or retaking the Senate. But since it&#8217;s virtually impossible for them to get control of the House, there isn&#8217;t much opportunity to go on offense.</p>
<p>Actually, that last paragraph is wrong. The best that Democrats can hope for is that Republicans, instead of choosing a Reaganite, nominate and elect a president from the <a target="_blank" href="https://danieljmitchell.wordpress.com/2010/04/10/bush-was-a-statist-not-a-conservative/">Nixon-Bush wing of the party</a>. Many of the biggest expansions in the size and scope of the federal government have taken place with such Republicans in the White House.</p>
<p>But that&#8217;s a topic for another column.</p>
http://www.cato.org/publications/commentary/republicans-are-winning-fiscal-fightThu, 18 Dec 2014 09:37 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDebunking the Debunking of Dynamic Scoring and the Laffer Curvehttp://www.cato.org/blog/debunking-debunking-dynamic-scoring-laffer-curve
<p>Many statists are worried that Republicans may install new leadership at the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).</p>
<p>This is a big issue because these two score-keeping bureaucracies on Capitol Hill tilt to the left and have a lot of power over fiscal policy.</p>
<p>The JCT produces revenue estimates for tax bills, yet all their numbers are <a href="https://danieljmitchell.wordpress.com/2010/07/21/the-joint-committee-on-taxations-voodoo-economics/">based on the naive assumption</a> that tax policy generally has no impact on overall economic performance. <a href="http://freedomandprosperity.org/wp-content/uploads/2014/11/cartoon-cbo.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/11/cartoon-cbo.jpg" width="219" height="161" style="float: left;"></a>Meanwhile, CBO produces both estimates for spending bills and also fiscal commentary and analysis, much of it <a href="https://danieljmitchell.wordpress.com/2011/10/29/cbos-witch-doctor-economics-and-gypsy-forecasting/">based on the Keynesian assumption</a> that government spending boosts economic growth.</p>
<p>I personally have doubts <a href="https://danieljmitchell.wordpress.com/2014/11/15/proper-staffing-and-reform-of-jct-and-cbo-is-an-iq-test-for-the-republican-party/">whether congressional Republicans are smart enough</a> to make wise personnel choices, but I hope I&#8217;m wrong.</p>
<p>Matt Yglesias of <a href="http://www.cato.org/www.vox.com">Vox</a> also seems pessimistic, but for the opposite reason.</p>
<p>He has <a href="http://www.vox.com/2014/12/7/7315961/dynamic-scoring-tax-reform">a column</a> criticizing Republicans for wanting to push their policies by using “magic math” and he specifically seeks to debunk the notion - sometimes referred to as dynamic scoring or the <a href="https://danieljmitchell.wordpress.com/2011/03/03/a-laffer-curve-tutorial/">Laffer Curve</a> - that changes in tax policy may lead to changes in economic performance that affect economic performance.</p>
<p>He asks nine questions and then provides his version of the right answers. Let&#8217;s analyze those answers and see which of his points have merit and which ones fall flat.</p>
<p>But even before we get to his first question, I can&#8217;t resist pointing out that he calls dynamic scoring “an accounting gimmick from the 1970s” in his introduction. That is somewhat odd since the JCT and CBO were both completely controlled by Democrats at the time and there was zero effort to do anything other than static scoring.</p>
<p>I suppose Yglesias actually means that dynamic scoring first became an issue in the 1970s as Ronald Reagan (along with Jack Kemp and a few other lawmakers) began to argue that lower marginal tax rates would generate some revenue feedback because of improved incentives to work, save, and invest.</p>
<p>Now let&#8217;s look at his nine questions and see if we can debunk his debunking:</p>
<!--break--><p style="padding-left: 30px;"><strong>1. The first question</strong> is “What is dynamic scoring?” and Yglesias responds to himself by stating it “is the idea that when estimating the budgetary impact of changes in tax policy, you ought to take into account changes to the economy induced by the policy change” and he further states that it “sounds like a reasonable idea.”</p>
<p style="padding-left: 30px;">But then he says the real problem is that conservatives exaggerate and “say that large tax cuts will have a relatively small impact on the deficit—or even that they make the deficit smaller” and that they “cite an idea known as the Laffer Curve to argue that tax cuts increase growth so much that tax revenues actually rise.”</p>
<p style="padding-left: 30px;">He&#8217;s sort of right. There are definitely examples of conservatives overstating the pro-growth impact of tax cuts, particularly when dealing with proposals—such as expanded child tax credits—that presumably will have <a href="https://danieljmitchell.wordpress.com/2014/08/21/lower-tax-rates-targeted-tax-credits/">no impact on economic performance</a> since there is no change in marginal tax rates on productive behavior.</p>
<p style="padding-left: 30px;">But notice that he doesn&#8217;t address the bigger issue, which is whether the current approach (static scoring) is accurate and appropriate even when dealing with major changes in marginal tax rates on work, saving, and investment. That&#8217;s what so-called <a href="https://danieljmitchell.wordpress.com/2013/08/19/the-common-sense-case-for-dynamic-scoring/">supply-side economists care about</a>, yet Yglesias instead prefers to knock down a straw man.</p>
<p style="padding-left: 30px;"><strong>2. The second question</strong> is “What is the Laffer Curve?” and Yglesias answer his own question by asserting that the “basic idea of the curve is that sometimes lower tax rates lead to more tax revenue by boosting economic growth.” He then goes on to ridicule the notion that tax cuts are self-financing, even citing <a href="http://www.nationalreview.com/articles/229574/goodbye-supply-side-kevin-d-williamson">a column</a> by <em>National Review&#8217;s</em> Kevin Williamson.</p>
<p style="padding-left: 30px;">Once again, Yglesias is sort of right. Some Republicans have made silly claims, but <a href="https://danieljmitchell.wordpress.com/2010/05/05/whats-the-future-for-supply-side-economics/">he mischaracterizes</a> what Williamson wrote.</p>
<p style="padding-left: 30px;"><a href="http://freedomandprosperity.org/wp-content/uploads/2014/10/Laffer-Curve1.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/10/Laffer-Curve1.jpg" width="304" height="267" style="float: right;"></a>More specifically, he&#8217;s wrong in asserting that the Laffer Curve is all about whether tax cuts produce more revenue. Instead, the notion of the curve is simply that you can&#8217;t calculate the revenue impact of changes in tax rates without <a href="https://danieljmitchell.wordpress.com/2014/10/21/the-real-world-impact-of-higher-tax-rates-on-upper-income-households/">also measuring the likely change in taxable income</a>. The actual revenue impact of changes in tax rates will then depend on whether you&#8217;re on the upward-sloping part of the curve or downward-sloping part of the curve.</p>
<p style="padding-left: 30px;">The real debate is the shape of the curve, not whether a Laffer Curve exists. Indeed, I&#8217;m <a href="https://danieljmitchell.wordpress.com/2010/08/18/whats-the-ideal-point-on-the-laffer-curve/">not aware of a single economist</a>, no matter how far to the left (including <a href="https://danieljmitchell.wordpress.com/2013/12/07/progress-on-the-laffer-curve/">John Maynard Keynes</a>), who thinks a 100 percent tax rate maximizes revenue. Yet that&#8217;s the answer from the JCT. Moreover, the Laffer Curve also shows that <a href="http://danieljmitchell.wordpress.com/2012/04/10/the-laffer-curve-shows-that-tax-increases-are-a-very-bad-idea-even-if-they-generate-more-tax-revenue/">tax increases can impose very high economic costs even if they do raise revenue</a>, so the value of using such analysis is not driven by whether revenues go up or down.</p>
<p style="padding-left: 30px;"><strong>3. The third question</strong> is “So do tax cuts boost economic growth?” and Yglesias responds by stating “the credible research on the matter is very very mixed.” But he follows that response by citing research which concluded that “a tax cut financed by reductions in wasteful spending or social assistance for the elderly would boost growth.”</p>
<p style="padding-left: 30px;">But that leaves open the question as to whether the economy does better because of the lower tax burden, the lower spending burden, or some combination of the two effects. But I&#8217;ll take any of those three answers.</p>
<p style="padding-left: 30px;">So is he “sort of right” again? Not so fast. Yglesias also cites the Congressional Research Service (which <a href="https://danieljmitchell.wordpress.com/2010/11/09/our-tax-dollars-are-funding-bureaucrats-who-advise-congress-that-higher-taxes-increase-prosperity/">rubs me the wrong way</a>) and a couple of academic economists who concluded that there is “no systematic correlation between the level of taxation and the level of economic growth.”</p>
<p style="padding-left: 30px;">The bottom line is that there&#8217;s no consensus on the economic impact of taxation (in part because it is difficult to disentangle the impact of taxes from the impact on spending, and that&#8217;s not even including all the other policies that determine economic performance). But I still think Yglesias is being a bit misleading because there is <a href="https://danieljmitchell.wordpress.com/2013/01/17/based-on-a-review-of-studies-looking-at-the-impact-of-taxes-on-growth-academic-research-gives-obama-a-record-of-0-23-3/">far more consensus on the economic impact of marginal tax rates</a> and debates about the Laffer Curve and dynamic scoring <a href="https://danieljmitchell.wordpress.com/2014/09/20/the-laffer-curve-and-limits-to-class-warfare-tax-policy/">very often revolve around those types of tax policies</a>.</p>
<p style="padding-left: 30px;"><strong>4. The fourth question</strong> is “How does tax scoring work now?” and Yglesias respond to himself by noting that the various score-keeping bureaucracies measure “demand-side effects” and “behavioral effects.”</p>
<p style="padding-left: 30px;">He&#8217;s right, but CBO uses so-called demand-side effects <a href="https://danieljmitchell.wordpress.com/2009/12/03/cbo-the-wizard-of-oz-and-the-keynesian-fairy-tale/">to justify Keynesian spending</a>, so that&#8217;s not exactly reassuring news for people who focus more on <a href="https://danieljmitchell.wordpress.com/2013/03/06/challenge-for-keynesian-anti-sequester-hysterics-why-did-americas-economy-boom-when-reagan-and-clinton-reduced-the-burden-of-spending/">real-world evidence</a>.</p>
<p style="padding-left: 30px;">And he&#8217;s also right that JCT measures changes in behavior (such as <a href="https://danieljmitchell.wordpress.com/2013/03/06/challenge-for-keynesian-anti-sequester-hysterics-why-did-americas-economy-boom-when-reagan-and-clinton-reduced-the-burden-of-spending/">smokers buying fewer cigarettes</a> if the tax goes up), and this type of analysis (sometimes called microeconomic dynamic scoring) certainly is a good thing.</p>
<p style="padding-left: 30px;">But the real controversy is about macroeconomic dynamic scoring, which we&#8217;ll address below.</p>
<p style="padding-left: 30px;"><strong>5. The fifth question</strong> is “Can we take a break from all this macroeconomic modeling?” and is simply an excuse for Yglesias to make a joke, though I can&#8217;t tell whether he is accusing Reagan supporters of being racists or mocking some leftists for accusing Reagan supporters of being racist.</p>
<p style="padding-left: 30px;">So I&#8217;m not sure how to react, other than to recommend the <a href="https://danieljmitchell.wordpress.com/2011/01/20/seven-historic-videos-to-celebrate-the-30th-anniversary-of-ronald-reagans-inauguration/">fourth video at this link</a> if you want some real Reagan humor.</p>
<p style="padding-left: 30px;"><strong>6. The sixth question</strong> is “What do current scoring methods leave out?” and Yglesias accurately notes that what “dynamic-scoring proponents want is a model of macroeconomic consequences. They think that a country with lower tax rates will see more investment in physical and human capital, leading to more productivity, and more economic growth.”</p>
<p style="padding-left: 30px;">He even cites <a href="https://danieljmitchell.wordpress.com/2014/11/24/why-do-some-advocates-of-small-government-want-to-keep-a-democrat-appointee-at-cbo/">my blog post from last month</a> and correctly describes me as believing that it is “self-evidently ridiculous that the current CBO model says higher tax rates would lead to faster economic growth via lower deficits.”</p>
<p style="padding-left: 30px;">I also think he is fair in pointing out that “people sharply disagree about how much tax rates actually influence economic growth” and that “the whole terrain is enormously contested.”</p>
<p style="padding-left: 30px;">But this is why I think my view is the reasonable middle ground. At one extreme you find (at least in theory) some over-enthusiastic Republican types who argue that all tax cuts are self-financing. At the other extreme you find the JCT saying tax policy has no impact on the economy and actually arguing that <a href="https://danieljmitchell.wordpress.com/2010/09/30/overhauling-cbo-and-jct-is-the-real-test-of-gop-resolve-not-the-pledge-to-america/">you maximize tax revenue with 100 percent tax rates</a>. I suspect that Yglesias, if pressed, will agree the JCT approach is nonsensical.</p>
<p style="padding-left: 30px;">So why not have the JCT—in a fully transparent manner—begin to incorporate macroeconomic analysis?</p>
<p style="padding-left: 30px;"><strong>7. The seventh question</strong> is “Has dynamic scoring ever been tried?” and Yglesias self-responds by pointing out that a Treasury Department dynamic analysis of the 2001 and 2003 tax cuts come to the conclusion that “the resulting budget impact would be 7 percent smaller than what was suggested by conventional scoring methods” and “ended with the conclusion that the Bush tax cuts substantially decreased revenue.”</p>
<p style="padding-left: 30px;">In other words, dynamic analysis was not used to imply that tax cuts are self-financing. Indeed, the dynamic score in the example of what would happen if the Bush tax cuts were made permanent turned out to be very modest.</p>
<p style="padding-left: 30px;">So why, then, are folks on the left so determined to block reforms that, in practice, don&#8217;t yield dramatic changes in numbers? My own guess, for what it&#8217;s worth, is that they don&#8217;t want any admission or acknowledgement that lower tax rates are better for growth than higher tax rates.</p>
<p style="padding-left: 30px;"><strong>8. The eighth question</strong> is “Why are we talking about dynamic scoring now?” and Yglesias answers his own question by accurately stating that “the Republican takeover of Congress starting in 2015 gives the GOP an opportunity to either change the scoring rules, change the personnel in charge of the scoring, or both.”</p>
<p style="padding-left: 30px;">He&#8217;s not just sort of right. He&#8217;s completely right. I have no disagreements.</p>
<p style="padding-left: 30px;"><strong>9. The ninth question</strong> is “Why does the score matter?” and his self-response is “the scores matter because perceptions matter in politics.” In other words, politicians don&#8217;t want to be accused of enacting legislation that is predicted to increase red ink.</p>
<p style="padding-left: 30px;">Yglesias is also right when he writes that this “effect shouldn&#8217;t be exaggerated. In the past, Republicans haven&#8217;t hesitated to vote for tax measures that the CBO says will increase the deficit. That&#8217;s because they have a strong preference for low tax rates.”</p>
<p style="padding-left: 30px;">At the risk of being boring, I also think he&#8217;s right about the degree to which scores matter.</p>
<p>The bottom line is that questions #1, #2, #3, and #6 are the ones that matter. Yglesias makes plenty of reasonable points, but I think his argument ultimately falls flat because he spends too much time attacking the all-tax-cuts-pay-for-themselves straw man and not enough time addressing whether it is reasonable for the JCT to use a methodology that assumes taxes have no effect on the overall economy.</p>
<p>But I expect to hear similar arguments, expressed in a more strident fashion, if Republicans take prudent steps—starting with personnel changes—to modernize the JCT and CBO apparatus.</p>
<p>P.S. While tax cuts usually do lead to revenue losses, there is at least <a href="http://danieljmitchell.wordpress.com/2011/11/06/a-lesson-on-the-laffer-curve-for-barack-obama/">one very prominent case</a> of lower tax rates leading to more revenue.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/11/aicpa-laffer-curve.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/11/aicpa-laffer-curve.jpg" width="270" height="159" style="float: right;"></a>P.P.S. If the JCT approach is reasonable, why do the <a href="https://danieljmitchell.wordpress.com/2012/11/14/the-joint-committee-on-taxations-head-in-the-sand-approach-to-the-laffer-curve/">overwhelming majority of CPAs disagree</a>? Is it possible that they have more real-world understanding of how taxpayers (particularly <a href="https://danieljmitchell.wordpress.com/2011/09/19/one-simple-reason-and-two-easy-steps-to-show-why-obamas-soak-the-rich-tax-hikes-wont-work/">upper-income taxpayers</a>) respond when tax rates change?</p>
<p>P.P.P.S. If the JCT approach is reasonable, why do international bureaucracies so often produce analysis showing a Laffer Curve?</p>
<ul>
<li>Such as&nbsp; <a href="http://danieljmitchell.wordpress.com/2013/05/17/oecd-study-admits-income-taxes-penalize-growth-acknowledges-that-tax-competition-restrains-excessive-government/">this study from the OECD</a>&nbsp;acknowledging that lower tax rates can lead to more taxable income.</li>
<li>Or&nbsp;<a href="http://danieljmitchell.wordpress.com/2012/02/27/if-even-the-international-monetary-fund-acknowledges-the-laffer-curve-why-doesnt-obama-realize-that-higher-tax-rates-are-all-pain-and-no-gain/">this study by the IMF</a>, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.</li>
<li>Or&nbsp;<a href="http://danieljmitchell.wordpress.com/2010/05/05/whats-the-future-for-supply-side-economics/">this European Central Bank study</a>&nbsp;showing substantial Laffer Curve effects.</li>
<li>Or the&nbsp;<a href="http://danieljmitchell.wordpress.com/2012/09/28/another-push-for-global-taxation-from-the-united-nations/">United Nations admitting</a>&nbsp;that the Laffer Curve limits the feasible amount of taxes that can be imposed.</li>
</ul>
<p>There&#8217;s also some nice evidence from <a href="https://danieljmitchell.wordpress.com/2012/07/09/if-tax-policy-is-any-indication-birthers-should-accuse-obama-of-being-born-in-denmark/">Denmark</a>,&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/09/20/the-laffer-curve-and-limits-to-class-warfare-tax-policy/">Canada</a>,&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/01/26/the-laffer-curve-works-even-in-france/">France</a>, and the&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/12/04/will-obama-learn-from-englands-laffer-curve-mistake/">United Kingdom</a>.</p>
http://www.cato.org/blog/debunking-debunking-dynamic-scoring-laffer-curveTue, 09 Dec 2014 17:02 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the EPA's new proposed regulations on controlled waters on FBN's The Willis Reporthttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-epas-new-proposed-regulations-controlled
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-epas-new-proposed-regulations-controlledMon, 08 Dec 2014 12:57 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses government spending on WABC's The Larry Kudlow Showhttp://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-government-spending-wabcs-larry-kudlow
http://www.cato.org/multimedia/media-highlights-radio/daniel-j-mitchell-discusses-government-spending-wabcs-larry-kudlowSat, 06 Dec 2014 13:01 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses a federal gas tax increase on FBN's Cavutohttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-federal-gas-tax-increase-fbns-cavuto
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-federal-gas-tax-increase-fbns-cavutoThu, 04 Dec 2014 13:06 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses Business Round table's study on CEO's economic outlooks and the impact of business regulations on growth on FBN's The Willis Reporthttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-business-round-tables-study-ceos-economic
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-business-round-tables-study-ceos-economicWed, 03 Dec 2014 13:30 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellTwo Very Depressing Charts for President Obama, Two Very Encouraging Charts for America's Taxpayershttp://www.cato.org/blog/two-very-depressing-charts-president-obama-two-very-encouraging-charts-americas-taxpayers
<p>Let&#8217;s look at some fiscal data that must be very depressing for President Obama and other advocates of big government.</p>
<p>Which means, of course, that this information must be very good news for American taxpayers!</p>
<p>Here&#8217;s a chart looking at annual federal spending since 2000. You&#8217;ll notice that spending skyrocketed from 2000-2009 (a time when libertarians <a href="https://danieljmitchell.wordpress.com/2012/06/12/obama-is-a-big-spender-just-like-bush/">were justifiably glum</a>), but look at how the growth of government came to a screeching halt after 2009.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/Obama-Spending-Binge.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/Obama-Spending-Binge.jpg" alt="" width="562" height="342"></a></p>
<p>Here are some specific numbers culled from the <a href="http://www.whitehouse.gov/omb/budget/Historicals/">OMB data</a> and <a href="http://www.cbo.gov/publication/49759">CBO data</a>. In fiscal year 2009, the federal government spent about $3.52 trillion. In fiscal year 2014 (which ended on September 30), the federal government spent about $3.50 trillion.</p>
<p>In other words, there&#8217;s been no growth in nominal government spending over the past five years. It hasn&#8217;t received nearly as much attention as it deserves, but there&#8217;s been a spending freeze in Washington.</p>
<p>Now let&#8217;s look at what happens when government is put on a diet.</p>
<!--break--><p>
<a href="http://freedomandprosperity.org/wp-content/uploads/2011/11/golden-rule.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2011/11/golden-rule.jpg" width="270" height="189" style="float: right;"></a>I&#8217;ve periodically discussed <a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/">my Golden Rule</a>, which says that good fiscal policy takes place when government spending grows slower than the private sector.</p>
<p>And even though we <a href="https://danieljmitchell.wordpress.com/2014/02/25/long-term-growth-and-the-corrosive-impact-of-obamanomics/">haven&#8217;t had impressive growth during the Obama years</a>, there have been modest increases in both nominal GDP as well as inflation-adjusted (real) GDP.</p>
<p>In other words, the Golden Rule has been in effect since 2009. As a result, the burden of government spending, relative to the economy&#8217;s productive sector, has been declining.</p>
<p>Here&#8217;s another chart that will be very depressing for the President and other statists.</p>
<p><a href="http://freedomandprosperity.org/wp-content/uploads/2014/12/Obama-Spending-GDP.jpg"><img src="http://freedomandprosperity.org/wp-content/uploads/2014/12/Obama-Spending-GDP.jpg" alt="" width="587" height="329"></a></p>
<p>What&#8217;s really remarkable is that we&#8217;ve seen the biggest drop in the burden of government spending since the end of World War II.</p>
<p>Heck, the fiscal restraint over the past five years has resulted in a bigger drop in the relative size of government in America than what <a href="https://danieljmitchell.wordpress.com/2014/04/07/the-golden-rule-of-spending-restraint/">Switzerland achieved</a> over the past ten years thanks to the “<a href="https://danieljmitchell.wordpress.com/2012/04/26/switzerlands-debt-brake-is-a-role-model-for-spending-control-and-fiscal-restraint/">debt brake</a>.”</p>
<p>At this point, some readers may be wondering who or what deserves credit for this positive development. I&#8217;ll offer a couple of explanations.</p>
<p>The first two points are about why we shouldn&#8217;t overstate what&#8217;s actually happened.</p>
<p style="padding-left: 30px;">1. The good news is somewhat exaggerated because we had a <a href="https://danieljmitchell.wordpress.com/2011/08/24/is-obama-really-going-to-propose-another-keynesian-stimulus/">huge spike in federal spending in 2009</a>. To use an analogy, it&#8217;s easy to lose some weight if you first go on a big eating binge for a couple of years.</p>
<p style="padding-left: 30px;">2. Some of the fiscal discipline is illusory because certain revenues that flow to the Treasury, such as TARP repayments from banks, actually count as negative spending. I explained this phenomenon <a href="https://danieljmitchell.wordpress.com/2013/08/29/mirror-mirror-on-the-wall-barack-obama-surprisingly-is-not-the-biggest-spender-of-all/">when measuring which Presidents have been the biggest spenders</a>.</p>
<p>But there also are some real reasons why we&#8217;ve seen genuine spending restraint.</p>
<p style="padding-left: 30px;">3. The “Tea Party” election of 2010 resulted in a GOP-controlled House that was <a href="https://danieljmitchell.wordpress.com/2013/08/12/very-good-news-the-tea-party-has-altered-the-spending-trajectory-in-washington/">somewhat sincere about controlling federal outlays</a>.</p>
<p style="padding-left: 30px;">4. The spending caps adopted as part of <a href="https://danieljmitchell.wordpress.com/2011/07/22/republicans-may-win-the-debt-limit-fight-i-wont-believe-it-til-i-see-it-and-im-not-sure-it-would-matter/">the debt limit fight in 2011</a> have curtailed spending increases as part of the appropriations process.</p>
<p style="padding-left: 30px;">5. In the biggest fiscal loss President Obama has suffered, <a href="https://danieljmitchell.wordpress.com/2013/02/05/exposing-the-absurdity-of-washingtons-anti-sequester-hysteria/">we got a sequester</a> that reduced the growth of federal spending.</p>
<p style="padding-left: 30px;">6. Many states <a href="https://danieljmitchell.wordpress.com/2014/07/14/an-under-appreciated-victory-over-obamacare/">have refused to expand Medicaid</a>, notwithstanding the lure of temporary free money from Uncle Sam.</p>
<p style="padding-left: 30px;">7. Government shutdown fights may be messy, but <a href="https://danieljmitchell.wordpress.com/2013/10/17/five-important-takeaways-from-the-government-shutdown-debt-limit-fight/">they tend to produce</a> a greater amount of fiscal restraint.</p>
<p>And there are surely other reasons to list, including <a href="https://danieljmitchell.wordpress.com/2014/07/06/the-left-was-wrong-about-unemployment-insurance-plus-a-message-from-1948-about-markets-vs-statism/">the long-overdue end</a> of seemingly permanent unemployment benefits and <a href="https://danieljmitchell.wordpress.com/2012/08/07/a-sequester-doesnt-mean-the-sky-is-falling-not-even-for-the-defense-budget/">falling defense outlays</a> as forces are withdrawn from Iraq and Afghanistan.</p>
<p>The bottom line is that the past five years have been a victory for advocates of limited government.</p>
<p>But now for the bad news. All this progress will be wiped out very quickly if there&#8217;s not <a href="https://danieljmitchell.wordpress.com/2011/11/28/everything-you-need-to-know-about-entitlement-reform/">genuine entitlement reform</a>.</p>
<p>The long-run fiscal forecasts, whether <a href="http://danieljmitchell.wordpress.com/2014/07/31/americas-built-in-greek-fiscal-future/">from the Congressional Budget Office</a> or from international bureaucracies such as the <a href="https://danieljmitchell.wordpress.com/2013/07/02/mirror-mirror-on-the-wall-which-nation-is-in-the-deepest-fiscal-doo-doo-of-all/">IMF</a>,&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/05/22/mirror-mirror-on-the-wall-which-nation-has-the-most-debt-of-all-2/">BIS</a>, and&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/05/11/a-taxapalooza-more-taxpayer-subsidized-agitation-for-class-warfare-by-the-oecd/">OECD</a>, show that America will become a European-style welfare state over the next couple of decades in the absence of significant changes to programs such as Social Security, Medicare, Medicaid, and Obamacare.</p>
<p>So let&#8217;s enjoy our temporary victory but work even harder to avert a future fiscal crisis.</p>
http://www.cato.org/blog/two-very-depressing-charts-president-obama-two-very-encouraging-charts-americas-taxpayersTue, 02 Dec 2014 17:06 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses economic policy at The Centre for Independent Studies in Australiahttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-economic-policy-centre-independent
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-economic-policy-centre-independentMon, 01 Dec 2014 12:07 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. MitchellDaniel J. Mitchell discusses the minimum wage on C-SPAN's Washington Journalhttp://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-minimum-wage-c-spans-washington-journal
http://www.cato.org/multimedia/media-highlights-tv/daniel-j-mitchell-discusses-minimum-wage-c-spans-washington-journalFri, 28 Nov 2014 12:02 ESTDaniel J. Mitchell (Author at Cato Institute)Daniel J. Mitchell